Payroll Basics

Payroll is a key area of the business, and it's important to understand the process behind it and how to carry it out correctly. If you're not comfortable running payroll, many accountants offer this service and can run it for you. You can find a list of these on our sister site, Find An Accountant, by going to 'Search by services' and selecting 'Payroll'.

Payroll

Do I need to run payroll?

There are two questions you need to be able to answer which will tell you whether you need to run payroll:

Are you a sole trader or partnership? If yes, you don't need to run payroll for yourself but you will need to for employees (if you have them). This is because, legally, there's no separation between you and the business.
Do you have employees? Generally, anyone with a contract of employment is classed as an employee. But there are also some extensions to this - directors, for example, are also employees. Remember - a limited company is a separate legal entity to their directors.

I need to run payroll. Where do I start?

First things first - you need to register as an employer with HMRC to notify them that you will be paying your employees. You will need to submit the registration within the two months before the first payday. However, keep in mind that it can take two weeks for the application to be processed.

What are the key parts of running payroll?

Before you start to run payroll, let's take a look at the key parts you need to know about.

Payslips - You will need to produce payslips for each employee every time they are paid. This also includes P45s and P60s when the time comes
RTI - You need to tell HMRC how much you're paying each employee, and when through their Real Time Information service.
Records - You need to keep records of what you pay, tax code notices, payments to HMRC and more for a minimum of 3 years from the end of the tax year they relate to. There's more information on this here.

Sounds scary, right? There are plenty of packages out there that can do this for you and help make things a bit easier. HMRC have very kindly produced a list of free and paid software providers on their website.

Some packages will also help you manage what you owe to HMRC for PAYE or National Insurance, and remind you about payments to help you avoid overdue penalties.

What should I be paying staff?

There is no right or wrong answer to this question, but there are some things you need to keep in mind to make sure it's legal and above board.

Minimum or Living Wage - you will need to pay your employees no less than this amount per hour.
Employer's National Insurance - paid to HMRC by the employer
Employee's National Insurance - which is deducted from the employee's wages
Pension contributions (auto-enrolment)
Industry average pay rate for the role

You can check out more about National Insurance rates on the GOV UK website

You should take these things into consideration when deciding on the rate of pay for an employee. When deciding on your own pay rate as a director, most usually go for the rate around the personal allowance for the tax year - your accountant can normally help with this part.

You can also decide how often they should be paid. Common times are weekly, 4 weekly or monthly.

Reporting

Things like this wouldn't be complete without reports. RTI is the main submission of reports, but includes monthly and annual submissions. Your payroll software provider can normally help with these and advise you on when you need to send them.